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Key Takeaways
- The SEC proposed scrapping the trade-through rule, which analysts say has been a structural barrier to trading tokenized stocks through DeFi liquidity pools.
- AMMs can’t comply with the rule by design since they execute against bonding curves rather than routing to the best displayed quote.
- TD Cowen expects the final rule by early 2027, with the SEC likely granting exemptive relief for tokenization pilots before then.
The Securities and Exchange Commission (SEC) proposed rescinding two Regulation NMS rules on Thursday, a move analysts say could remove a major structural barrier to decentralized trading of tokenized U.S. stocks. The proposal targets the trade-through rule and a second rule that limits locked and crossed quotes.
SEC Targets 2005 Market Rules Behind Quote Protection
The SEC proposed rescinding Rules 611 and 610(e) of Regulation NMS, both established in 2005. Rule 611 bars a trading venue from executing a stock trade at a price worse than the best displayed quote available on another venue at the time of execution. Rule 610(e) restricts trading centers from displaying quotes that lock or cross the National Best Bid and Offer.
SEC Chairman Paul Atkins said in a statement that after two decades, the rule’s unintended consequences have hindered rather than enhanced the long-term growth of U.S. markets. He said the proposal is intended to simplify market structure and reduce costs for participants while letting competition and innovation shape how equity markets evolve.
The proposal also removes related Rule 600 definitions tied to the rescinded provisions and makes conforming changes elsewhere in Regulation NMS. A 60-day public comment period begins once the proposal is published in the Federal Register.
Analysts Say Rule 611 Has Been a Structural Barrier for AMMs
Alex Thorn, head of firmwide research at Galaxy Digital, called the proposal “one of the biggest unlocks yet” for tokenized stocks in decentralized finance. He said automated market makers cannot comply with Rule 611 by design, since they execute trades against a bonding curve at whatever price the pool holds, with slippage determined at block-time granularity.
In a written analysis, Thorn said an AMM cannot route intermarket sweep orders, cannot ingest consolidated market data with the latency guarantees Rule 611 requires, and cannot halt a swap because a better quote exists on another exchange. Any liquidity pool trading a tokenized NMS stock would commit trade-throughs continuously and could be considered an illegal trading center under the current rule, he said.
Thorn said Rule 610(e) presents the same conflict. Because AMM prices move continuously with trading flow, they routinely lock or cross the displayed national best bid and offer, a condition the rule currently requires venues to prevent.
Broker-Level Best Execution Would Take Over From Rule 611
If the rules are rescinded, order handling would fall under FINRA Rule 5310’s best execution duty, a broker-level standard that is principles-based rather than enforced trade by trade. Thorn said that framework could accommodate AMMs in a way the current trade-through rule cannot.
Thorn argued the proposal would remove the most significant market-structure obstacle first, with venue registration questions to follow, at least temporarily, through an expected innovation exemption tied to the SEC’s Project Crypto initiative.
TD Cowen Sees Final Rule by Early 2027, With Tokenization Relief Before Then
Jaret Seiberg, managing director at TD Cowen’s Washington Research Group, said in a note Thursday that the proposal will likely be adopted, calling the repeal a long-standing priority for Atkins. He said he expects the SEC to finalize the rule in the first quarter of 2027.
Seiberg said the proposal is broadly positive for equity tokenization since Rule 611 has been a barrier to action. He added that the SEC is not expected to wait for finalization before approving tokenization pilots, and instead anticipates the agency will grant those early efforts exemptive relief from Rule 611 in the near term.
Tokenized U.S. equities in DeFi still face other regulatory hurdles, including exchange or alternative trading system registration requirements and clearance and settlement rules not designed for decentralized or peer-to-peer trading. Thorn said he expects many of these issues to be addressed in the SEC’s forthcoming innovation exemption.
